I HOLD THIS TRUTH TO BE SELF-EVIDENT, THAT A DEBT CRISIS CANNOT BE RESOLVED WITH MORE DEBT

Monday, March 1, 2010

What's For Dinner? Gullibility Pie

The Wall Street Journal reports that a secretive dinner meeting of top hedge fund managers took place recently, at which the subject was the euro going to parity against the US dollar. The gathering is dubbed the euro-dinner and the "short euro - long dollar" trade is characterized as a "career trade".

Yup... such is the level of financial reporting in the Murdoch Era.

EUR/USD

Let's pause to reflect on these "news":

Truly secretive meetings of market operators never, ever make it to the press. They wouldn't be secretive otherwise, would they now?

A routine, white bread-peanut butter-and-jelly position in the major currency FX market is never a "career trade". This market is simply too huge and efficient to score a major killing.

The euro is already down 11% from 1.52 to 1.35. It took the fear of bankruptcy (of Greece), insolvency (of the rest of the PIGS) and a huge badmouthing campaign in the US-controlled financial press to make it so.

We know that lots of mark-to-market money has already been made on the way down, particularly in sovereign CDS, shorting bonds and shares - plus the plain vanilla FX positions. The first three markets are illiquid and - to my knowledge - short positions are still mostly open.

So.... what better than a bit of hush-hush, nudge-nudge, wink-wink to push the credulous hoi polloi public into assuming the positions of said hedge fund managers, allowing them to turn open positions into ready cash gains. Trust me, it's not at all easy to get out of big short positions in small, illiquid markets. There is simply too much risk of a short squeeze. Remember the old adage: He who sells what isn't his'n, buys it back or goes to pris'n.

The Journal also mentions the euro-dinner took place at a townhouse and the menu featured lemon chicken and fillet mignon. Of course.. would you believe them if they said Bob's Greasy Spoon and Beefaroni?

Well, I say Gullibility Pie is on offer right now and it's being served on a silver platter, with all the trimmings. And it's free!

Don't bite.

P.S. I don't really need cred, at least not for readers of long standing, but I should point out that I was talking about the dollar's undervaluation last November, when it went to 1.50.See this post:2012 - Dollar At The End Of The World.

52 comments:

Take a look at your last comment on that post in November.You were ALREADY talking about insolvency in the satellite Euro countries.SO...To what extent is your/their attention to these countries, and your BELIEF that something is rotten in Greece actually... partially responsible for something EFFECTIVELY HAPPENING along these lines ?Remember...IT'S NOT FOR NOTHING THAT IT'S CALLED FIAT, you know... (You know all this already, in fact.)I won't ask the question as to WHY the various hedge fund managers and the Fed suddenly got all interested in Greece, of all places.No, because what's more interesting to me is how/why YOU suddenly started thinking talking about it ? (Your agenda is a little different from theirs, right ?)Murdoch's press ?Some other press ?

I would think that Germany, as #2 exporter in the world after China, is quite happy that the EURO is under pressure. I've been reading their papers and listening to their positions on Greece. Looks like Germany has little to no intentions on bailing Greece out. The lower the EURO sinks the larger the profit their export oriented economy stands to make. That means that the US and China will have a harder time competing against EURO based competitors. So if anybody wants to bailout Greece is should be the US since:a. it is in their own financial interestb. Goldman-Sucks helped Greece to cheat the EU by hiding a large part of their budget deficit.

Of course today it is Greece and tomorrow it could be the UK, Spain, Italy or even Japan with 190% debt to GDP. At the current rate the US will reach this stage within 10-15 years. Big spenders are in big trouble no matter where you look.

Sure, a good amount of their exports is to other EU countries but a low EURO works both ways as you noted. It makes imports from the US and China more expensive which benefits the local producers.It does increase the cost of some commodities but Germany is not nearly as oil dependent as the US. I would think the benefit offsets the extra money spend on oil. Still, the bottom line is that Germany sees very little benefit in bailing out Greece.Of course Germany also knows that if they bail out Greece then all the other deadbeats in the EU expect the same treatment. Soon too big to fail becomes too big to bail.The article made no distinction on how much of the exports goes to the EURO-zone versus the non-EURO part of the EU like the UK, Poland, etc.Is the British Pound in lockstep with the EURO or are they free floating? Not sure.

The Euro is over valued and debt & entitlements as a percentage of GDP in the Euro region is worse than the US. The USD sucks but the EUR swallows.

Let the Renminbi float it is as likely to crash as it is to rise.

All fiat currencies are in a race to the bottom and USD has already crashed. Everyone else will start to catch up. The USD is not strengthening in absolute value but other fiat currency are picking up speed...to the bottom.

“Better to be quiet and thought of as a fool then to speak up and remove all doubt."

I’ve always got and understood that angle… but what bothers me is that in the face of the media, with all eyes fixed on them, (and oaths being sworn) many leaders are still spin doctoring in TPTB’s favor. I finally got off my duff and put together an article for the RGE, with regards to public deception from our offials (past and present). I’m going to paraphrase a couple of your lines into the piece.

“Telling them to shut up when others say that they are incompetent because it is a legal defense to be found so. There is a very good legal reason why these guys spread the meme that they are incompetent and foolish.”

The piece is on Bloomberg, Corzine and Paulson. It’s just a short rant against them. (not a very ground breaking piece, but I feel like spitting on them for some things they’ve said lately)

As far as my belief in their roles of playing the fools???

I do believe some at the top, from a legal angle, do so in self preservation. …but the court of public opinion will have to be answered to, and if things go bad, I’d fear for these people.

My angst, is against their legions of minions whom are brainwashed individuals who kneel to the alter of the almighty dollar (eur, yen, whatever) It is a religion for so many of these guys, and their tear it up theology, with no regards for what the profit results from, is done in the name of free market capitalism. Like an individual throwing some trash out of his car window, it doesn’t seem like a lot of litter, but when their all doing it, and throwing out lots, it gets pretty messy pretty quick. (cue the crying Indian tear drops) These minions are just flying down the road, so they don’t see the destruction. They have to get their fast, and they are oblivious to the fact that their societal window dumping is destroying things because they go to fast to see it, and they’re never made to clean the mess up.

Reserve currency??? Naturally unity is needed. …but beyond unity is some sort of legal base/level. I can’t speak on behalf of the EU countries, since I don’t know the answer to this… but what kind of cross border legal contract laws does the EU have? What is and isn’t enforceable? …and what are the ramifications for non compliance? For anything to be a reserve, it needs to stand up to the scrutiny of it’s own internal legal certainty. (this is the beauty and fear that Greece brings up, because they may be damned either way. (bailout or default))

In my opinion, without that internal trust and ability to enforce contracts across borders, externally, no one will have any faith.

Rich...Have you ever considered the possibility that business is being done, and WELL, in an ethical manner in most areas outside of Wall Street, and that even on Wall Street and in the banks, there are lots of people trying to do business in an ethical manner ?The media spin naturally catches and holds out for perusal ANY KIND OF DUBIOUS activity.But... just how much dubious activity IS THERE compared to... HOW MUCH WE THINK THERE IS ??I'd stick my hand in the fire on the premise that there is LESS than we think there is.NOW... if you REALLY want to get worried, try dealing with the fact that people believe religiously that what they're doing is THE RIGHT THING.Yeah, that way you can REALLY worry, right ?Contracts= trust...That makes me want to throw up.BEURK contracts....Contracts are just ANOTHER part of the iceberg problem that's taking us down.It all pieces together.You need trust... WITHOUT contracts.Because.. trust WITH/IN contracts is NOT TRUST !!!

Money Markets are the pulse / life blood of the current economy. In the current system, it is what enables you to swipe your debit/credit card, and go to an ATM, and get paid by your office. They are what provide cash/credit availability worldwide. The MMKTs are the trickle that pays for the future investments, they are the financing availability behind the loan and the fractional reserve system.

Money market cash flow is like a heart beat. The brains of this lifecycle are the collateral on the other side. In good times , bad times, Lehman times, you need to be able to enforce that “brain side” of the deal to make sure the heart side still pumps.

The fluidity the US heartbeat (corrupt, fake, fiat, etc…) is based on that confidence in that legal certainty. To dismiss it seriously understates just how complex this organism is. That legal certainty is the “guarantee” that gives the MMKTs the ability to work.

A great quote from the movie Tommy Boy is: (hopefully this pastes OK from IMDB)

Tommy: Let's think about this for a sec, Ted. Why would somebody put a guarantee on a box? Hmmm, very interesting. Ted Nelson, Customer: Go on, I'm listening. Tommy: Here's the way I see it, Ted. Guy puts a fancy guarantee on a box 'cause he wants you to feel all warm and toasty inside. Ted Nelson, Customer: Yeah, makes a man feel good. Tommy: 'Course it does. Why shouldn't it? Ya figure you put that little box under your pillow at night, the Guarantee Fairy might come by and leave a quarter, am I right, Ted? [chuckles until he sees that Ted is not laughing] Ted Nelson, Customer: [impatiently] What's your point? Tommy: The point is, how do you know the fairy isn't a crazy glue sniffer? "Building model airplanes" says the little fairy; well, we're not buying it. He sneaks into your house once, that's all it takes. The next thing you know, there's money missing off the dresser, and your daughter's knocked up. I seen it a hundred times. Ted Nelson, Customer: But why do they put a guarantee on the box? Tommy: Because they know all they sold ya was a guaranteed piece of shit. That's all it is, isn't it? Hey, if you want me to take a dump in a box and mark it guaranteed, I will. I got spare time. But for now, for your customer's sake, for your daughter's sake, ya might wanna think about buying a quality product from me.

I love that movie!!!In our interconnected world, cross border contracts/guarantees will need honoring. If a foreign entity enters into a contact here, they and their counterparty here will both be bound by it. There’s no: “tough luck on you foreign entity.”

So, since I don’t know EU standards, practices, laws, etc… I ask… In order to become a reserve currency/house… you need to be accountable to outsiders playing in your sandbox. How do you honor foreign people’s (outsiders) contracts, when I’m not sure you have established a universal court to hold your internal members accountable for legal contracts/responsibilities??? To be a “reserve” this needs to be in place. Without this, you don’t have the collateral side of the MMKTs “guaranteed”. No pulse. …Dead!

“just how much dubious activity IS THERE compared to... HOW MUCH WE THINK THERE IS ??”

That’s precisely my point… Many of the religious minions don’t have a clue that they are burning the house down. It’s a broad systemic flaw. Compounding errors that have lead us to an abyss.

Finance used to be small in relation to overall size of the economy. It’s salary/extraction was the vig you pay to a bookie.

Now finance is the economy! The vig has grown substantially and is paid for with larger finance (rather then increased ANYTHING! ie. production, innovation, efficiency, etc…) that was only supported through ponzi markets.

I did an article on the overgrowth of the market a couple of years ago that I still stand by.

Well...I seem to remember that at varying times in the cours of Western history, the stock market has been abolished. Sent up in smoke.And the economy did NOT disappear because the stock market was sent up in smoke.This should tell us something.Rich, I have been spending many years reading William S on the subject of trust, oaths, contracts, the whole lot.What he said then is pertinent NOW.

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Very very interesting analysis, Rich.(You don't have to subscribe to read it, Okie, what's the problem ??)May I advise that YOU of all people read "the Merchant of Venice". YOU will appreciate it, and will not waste your time on it.Downward spiral ?This is what could be called the economics of "benediction" or... "malediction" (you hear me, Yoyo ?.)Now if only the banksters could figure out how Jesus multiplied the loaves and fishes...

I'm not sure exactly what you're referring to but I would definitely consider Lloyd Blankfien framing and hanging this creepy cartoon in his executive suite at Goldman Sucks easily qualifies as an egregious example of the economics of "malediction".

Economics of benediction : the story of Joseph, referring way back to the promise made to Abraham, along the lines of the descendance being as numerous as the stars in the sky (and that means that you can't count them, hint, hint..) The ideological basis for economic growth in our civilization, and the belief in its necessity and value. Economics of malediction : the scenario for what happens in "Macbeth", and other great tragedies where an initial, misguided action triggers a series of catastrophic multiplied reactions that decimate everyone until no one is left standing at the end.

"The piece is on Bloomberg, Corzine and Paulson. It’s just a short rant against them. (not a very ground breaking piece, but I feel like spitting on them for some things they’ve said lately)"

Are you kidding? A short rant for some things they said lately?

Paulson is a criminal who could make Bernie Madoff blanche. And there is no single example that better serves as evidence that the rule of law in the U.S. has broken down than that such a mendacious, malignant, canker sore of an office holder as Hank Paulson hasn't been indicted, prosecuted, and found guilty of one of the most audacious financial conspiracies of our time-namely sacrificing Lehman Brothers and Bear Stearns to pave the way for a massive bailout of Paulson's former employer, Goldman Sachs.

Examine the record, look at the statements, and you will see that is exactly what he did. However, that is hardly all that chrome dome master of disaster "achieved."

He and Geithner should have long since been run out on a rail before breakfast. That neither one has come within sniffing distance of having to post jaw dropping bail should leave the taste of bile in one's throat.

Please don't think I am weeping for Lehman or Bear. I'm not. Well, maybe a salty tear for those respective firm's cafeteria and custodial workers. In any event, my attitude towards those erstwhile Wall Street pillage mills couldn't be more beside the point.

If Woodward and Bernstein could come up with enough evidence to get the boulder rolling down hill with enough force to ultimately flatten Tricky Dick Nixon's Presidency, than the fact that we have done nothing to level a mere Secretary of The Treasury or two in our own age says quite a bit, none of it, of course, flattering.

Thai, your new found source for sound economic analysis sounds sensible enough until you take into account the fact, the fact mind you, that sovereign governments that operate with fiat currencies always default. That they may do it in a de facto manner as opposed to a de jure one is merely a matter of mostly politics.

In the meantime, you and the rest of the congregants may enjoy this lively discussion.

(Blankfein, according to Andrew Ross Sorkin’s book “Too Big to Fail,” displays a framed Gary Larson cartoon on his office wall. It depicts a father and son looking over the garden fence at a line of wolves entering the house next door. “I know you miss the Wainwrights Bobby,” the father is saying “but they were weak and stupid people, and that’s why we have wolves and other large predators.”)

Ron Paul exposes Prof. Carroll Quigley and the false Left-Right paradigm of the political parties. Professor Carroll Quigley, Tragedy & Hope: The argument that the two parties should represent opposed ideals and policies, one perhaps of the Right, and the other of the Left, is a foolish idea acceptable only to doctrinaire and academic thinkers. Instead, the two parties should be almost identical, so that the American people can 'throw the rascals out' at any election without leading to any profound or extensive shifts in policy.... [E]ither party in office becomes in time corrupt, tired, unenterprising, and vigorless. Then it should be possible to replace it, every four years if necessary, by the other party, which will be none of these things but will still pursue, with new vigor, approximately the same policies.

“[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences.”

Aw, Yoyo, the kind of thinking present in your last comment (not yours, I hope, but obviously somebody else's...) exemplifies the kind of simplistic scapegoating that gets me irritated.For every politico who reasons in terms of illegality or making a quick buck, there are 100, just like William Clinton during his first presidential campaign who cuttailed it back to Arkansas to have Ricky Ray Rector executed (remember, the guy who lobotomized himself during his holdup attempt, and wanted his dessert saved for after the execution ? !!!!) I know, I know, I resort to this example often but it is so TELLING, so... symptomatic of a certain political.. COWARDICE that makes our leaders so desperately try to appeal to those outside of their fold, while shamelessly ignoring their base.Why blame dishonesty when it requires MORE BALLS than cowardice ??

Edwardo, great video. The fractal building blocks of my mental opinions ended up agree with both sides of the video and disagreeing with each other.

If I can't get my own head to agree, I think the rest of us are doomed. ;-)

But it did get me thinking... Do you know if anyone has ever observed a temporal relationship between changes in a nation's productivity growth and its movement onto or off a gold currency standard?

For if Rich and Hell's basic premise is correct- namely all this financial complexity is a giant waste of time and talent- then wouldn't we expect to see a temporal relationship between a drop in US productivity anda the closing of the gold window in 1971? I.e. our "real economy" suffered as brilliant minds move away from careers in chemical engineering to finance 30+ years ago. ;-)

For those interested, I have fleshed out my comment on the economics of benediction/malediction on Street Rat. (I am encroaching just a little on your terrain, for once, Hell, but from a psychological standpoint, not a strict economic one.)Enjoy.

"For if Rich and Hell's basic premise is correct- namely all this financial complexity is a giant waste of time and talent- then wouldn't we expect to see a temporal relationship between a drop in US productivity anda the closing of the gold window in 1971? I.e. our "real economy" suffered as brilliant minds move away from careers in chemical engineering to finance 30+ years ago. ;-)"

You are on to something. Now take it further. Calling what ensued as a result of "globalization" a waste of time and talent lets the architects of what you allude to off much too easily, especially since they knew exactly what they were doing.

Perhaps you know this, but, essentially, globalization has been nothing more than a cover for a corporate agenda designed to both undermine democratic governance, and exploit labor overseas which would leave it supine at home.

The leaving labor prostrate at home part would lend itself to the erosion of democracy-which has always been a fragile socioeconomic arrangement even in the best of times-by eventually destroying the middle class. In a cruelly ironic turn, government swirls the drain that much faster as it can not meet its fiscal and financial obligations (due to a chronically shrinking tax base) thereby losing credibility amongst the same group whose taxes were what allowed the system to maintain itself in the first place.

The FIRE economy was the compensation, booby prize more like it, for the elimination of the U.S. manufacturing base and its workers. It should go without saying that Carl the Chemical engineering major didn't have nearly the bright future with the onset of the aforesaid agenda than he did before it came into being.

Closing the gold window was an early and integral part of the process of globalization. We can't have things like gold enforcing limits on the actions of those who seek to loot either through the ill advised creation of dodgy credit/debt, or through the equally egregious use of public monies for military expeditions against phantom enemies whose threat is vastly overstated.

Debauching the currency, which is what closing the gold window was, was essential to enabling the global pillagers to implement their program.

If it all sounds a tad conspiratorial, it is, but it was all right out in the open as I imagine the biggest and best conspiracies are.

Thanks for the response but I am not sure it really answers my question.

Does anyone else know if productivity growth rate changes have been temporally linked to changes on or off gold standards for a variety of nations at a variety of times in history?

... I am guessing that citizens of various nations probably wouldn't be willing to cooperate enough to let someone else do the necessary prospective randomized controlled trials required to settle the issue once and for all.

Anyone else have any other thoughts on a surrogate marker that might get at this particular variant of the endless "complexity is not your friend" thread?

Edwardo, your cynicism is showing.YOU know that globalization was going on in the Venetian empire, and that nobody closed a gold window at that time.Our ancestors went through the same angst on the subject of the... composition of their coins, as they increasingly FEARED that their money was worth less and less as the gold and silver IN THE COINS diminished.No conspiracy. Political power is too diffuse at this time, I feel, for conspiracy to be really viable.4-8 years in an electoral position do not provide the kind of stability that you need for widespread conspiracy. Too much uncertainty there as to who you're going to have as a "partner" in the future.Unless you mean that the technocrats are ruling everything anyway, and our electoral leaders are figureheads ?The corporate world (a vast number of people..) still craves the legitimacy that the word "democracy" gives. If we are governed by IT, at least "it" feels like keeping up appearances for the time being ?This is probably just another example of the old adage "nothing new under the sun"...

"YOU know that globalization was going on in the Venetian empire, and that nobody closed a gold window at that time."

- I know nothing of the sort. This is a poor juxtaposition. The differences far outweigh the similarities.

"Our ancestors went through the same angst on the subject of the... composition of their coins, as they increasingly FEARED that their money was worth less and less as the gold and silver IN THE COINS diminished.

-Yes, Deb, it's true that gold can and has been debauched, ergo, Gresham's Law. However, precious metals fraud and counterfeit is far far more difficult to pull off in gold than in paper.

No conspiracy.

-None of the sort that involves fat, balding, men puffing incessantly on stogies within a sanctum sanctorum. But, elites making decisions in a manner that can not be remotely described as ad hoc, YES.

"Political power is too diffuse at this time, I feel, for conspiracy to be really viable."

-Yes, (and though I am not religious) the Devil's greatest trick is getting the world to believe he doesn't exist. In any case, political power is provisional, the entities who pull the strings aren't in politics.

4-8 years in an electoral position do not provide the kind of stability that you need for widespread conspiracy.

-See above. If you look there you'll find nothing.

"Too much uncertainty there as to who you're going to have as a "partner" in the future. Unless you mean that the technocrats are ruling everything anyway, and our electoral leaders are figureheads ? The corporate world (a vast number of people..) still craves the legitimacy that the word "democracy" gives."

-No, "they" crave power, and legitimacy when it is sought is merely done so for strategic purposes.

"If we are governed by IT, at least "it" feels like keeping up appearances for the time being ?This is probably just another example of the old adage "nothing new under the sun"..."

-There's nothing new in human behavior or motivation, which is exactly to the point.

I submit that we raise our collective glasses to the prophet "caste" to which WE ALL BELONG, in one form or another.We on this blog, in any case. ;-)The prophet caste is the thorn in the side of organized power.Always has been. Always will be;(Well not EXCLUSIVELY. We know that there are prophets who take wrong turns, right Yoyo ? ;-))

Sorry Deb, but I was too busy giggling to spend much time sighing. I can't believe it survived the 20th century much less made it into the 21st. Like I said, at least it's harmless; not like this tragic & bloody shocker.

Hell or anyone else, do you know if there such a thing as a total world markets index fund?

In other words, is there a passive index for every conceivable place place money can exist that includes all stock markets, all bond markets, all real estate markets, all emerging markets, all commodity and gold markets, all currency markets, all derivative markets, etc... that a retail investors can purchase in one place at a very low cost?

Kind of like The Wilshire 5000 but for everything?

To the extent money flies from from currencies to gold to commodities to savings accounts to any other market money might hide in, the individual is protected from fickle movements, etc..?

Thai, even if you found a site like that, just where would the proverbial mattress or stocking solution show up in it ? (Solutions much more frequent than we can even imagine on this blog, lack of empathy oblige...)Going back to Carl the engineer... it makes me think about why all the French high school students are doing ECONOMIC high school diplomas, and the college students are heading off to business school in droves.Nothing like having an economy made up of hordes of financial wizzes where you can't find hardly no one who knows how to grow a potato.No "conspiracy" involved in that. No tactics, no closing windows. "It's the... MARKET, stupid." Once more, it's the overwhelming collective desire for financial and personal security that is powering that boat.

About Me

I was educated as a chemical engineer but spent almost my entire career in finance, particularly in money, FX and bond markets. The name stands for Hell-as-IOUs and the picture points to Quixotic endeavors.